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Reason for introduction Dividends tax is a tax on the shareholder at 10% of a dividend declared whereas STC is a tax on a company declaring a dividend at 10 % of a dividend declared. Under dividends tax, DTA relief may be obtained. Example: SA Co declares a dividend to its shareholders who are tax resident in the UK. Result: The shareholders obtain no relief for STC paid by SA Co (as in terms of the Volkswagen case STC is not a tax on dividends), whereas under the DTA, the shareholders may obtain partial relief from dividends tax. Page 3

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Transitional issues S64E is applicable in respect of dividends declared and paid on or after the effective date i.e. 1 April Therefore a dividend declared and paid on or before 31 March 2012 is subject to STC. A dividend declared before 31 March 2012 but paid after that date will also be subject to STC. Page 4

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DT mechanism (1) If a SA resident company other than a ‘headquarter company’, or a non resident SA listed company declares a dividend, then it must withhold DT at 10 % from the dividend (although the rate can be lower if a DTA applies), unless: - a declaration and undertaking (see below) from the ‘beneficial owner’ is held on ‘a date determined by the company’, or if the company did not determine a date, then by the date of payment of the dividend; or -the ‘beneficial owner’ forms part of the same group of companies (as per S41) as the company that declared the dividend; or - the payment is to a ‘regulated intermediary’. Page 5

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DT mechanism (2) The declaration form may be prescribed by the Commissioner, and is to be issued where the dividend is exempt from DT in terms of S64F. The undertaking form may be prescribed by the Commissioner, and is to the effect that the ‘beneficial owner’ will forthwith inform the company in writing should the beneficial ownership change. SARS is loathe to make a standard form available. What is claims is the ‘minimum wording’ required is at under ‘tax types’, ‘dividends tax’, ‘business requirement specification’.www.sars.gov.za Page 6

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DT mechanism (3) If the dividend is to be subject to tax at a rate of less than 10 % due to the application of a DTA, then the declaration must state the applicable percentage to be withheld. This declaration must be submitted to the Commissioner ‘at the time and in the manner prescribed’ in circumstances where a reduced rate is applied due to a DTA. ‘Regulated intermediaries’ include a CIS in securities, corporate transfer secretaries and registered FSPs who hold investments on behalf of clients Page 7

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DT mechanism (4) The DT withholding obligation is shifted to the regulated intermediary When a regulated intermediary on-pays the dividend, DT must be withheld unless:  the dividend is paid to another regulated intermediary; or  the above declaration and undertaking is held by the regulated intermediary on ‘a date determined by the regulated intermediary’, or if the regulated intermediary did not determine a date, then on the date of payment of the dividend (presumably by the regulated intermediary). Page 8

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DT exemptions – S64F The dividend is exempt if the beneficial owner is: A SA resident company; Any of the 3 levels of Government; An approved public benefit organisation; A mining rehabilitation trust; Institutions established in terms of S10(1)(cA) [that provide services to the State or public and are approved by the Commissioner]; A benefit fund e.g. medical aid scheme; A pension, provident, retirement annuity or preservation fund; A S10(1)(t) institution e.g. CSIR, DBSA. A shareholder in a registered micro business (up to R of dividends paid by a micro business in a year of assessment are exempt); A non-resident if the dividend is paid by a non-resident company listed on the JSE. Page 9

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STC credit mechanism (1) Where the company declaring the dividend has an STC credit on 31 March 2012, then this credit is set off against dividends declared on or after that date and passed on to the recipient of the dividend, and becomes an STC credit available to the recipient. Companies are effectively deemed to have declared a dividend of Rnil on 31 March 2012 for purposes of computing STC credits available on that date. The passing on of STC credits is subject to the prior written notification by the company declaring the dividend to the person to whom the dividend is paid, of the amount by which the dividend paid has reduced the STC credit of the company (that declared the dividend). Page 10

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STC credit mechanism (2) The recipient may or may not be able to use the STC credit (for example where the recipient is not a company). STC credits will be available against in specie dividends. STC credits expire on 31 March If a company has previously made an interest free or a low interest loan to a shareholder or connected person, and the loan was deemed to be a dividend for STC purposes, then in order to obtain an STC credit for the loan, the loan must be repaid on or before 31 March If no STC credit is obtained, the reserves represented by the loan will potentially be subject to dividends tax. Page 11

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Example: STC credit mechanism (1) Facts: The shares in SA Co 1 are held 40 % by SA Co 2 and 60 % by a non- resident company. SA Co 1 has STC credits of R1 million at 31 March It declares a dividend of R1.5 million on 30 April 2012 and pays it on 15 May SA Co 2 has no STC credits at 31 March Its shareholders are natural persons. It declares a dividend of R2 million on 31 May 2012 and pays it on 20 June Result: Note: The STC credit mechanism is applied before considering S64F exemptions. Page 12

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Example: STC credit mechanism (2) SA Co 1: Provided that it notifies SA Co 2 and the non-resident company in writing by 15 May 2012 of the proportionate amount of the reduction in its STC credit due to the dividends paid to each i.e. R due to SA Co 2 and R due to the non-resident company, the R1 million STC credit available to SA Co 1 reduces the dividend subject to DT. Provided that the necessary declaration and undertaking has been received from SA Co 1, S64F will exempt 40 % of the remaining R dividend i.e. R , leaving DT of 10 % x R = R (to be paid by 30 June 2012 or the last business day before that date). Page 13 SA Co 1SA Co 2N/R Co 40%60% Dividend declared STC credit( )( ) Exemption( )- Dividend subject to DT %

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Example: STC credit mechanism (3) SA Co 2: Provided that it notifies its shareholders in writing by 20 June 2012 of the proportionate amount of the reduction in its STC credit due to the dividends paid to each, the R STC credit available reduces the dividend subject to DT. SA Co 2’s dividend subject to DT is therefore 100 % of (R2 million – R ) = R1.6 million, and the DT payable is 10 % of R1.6 million = R , to be paid by 31 July 2012 (or the last business day before that date). Page 14 SA Co 2Natural person 100% Dividend declared STC credit( ) Exemption - Dividend subject to DT %

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Dividends tax refund mechanism (ss64L and 64M) If a declaration is not held on the relevant date and is received within 3 years from the date of payment of the dividend by a company, say company A, then the company has to refund the dividends tax to the recipient of the dividend, say company B. Company B has to obtain the refund from company A, not from the Commissioner. Company A must refund the excess out of any dividends tax withheld by it within 1 year from the date of the submission of the late declaration. If the dividends tax withheld by company A within the 1 year period is insufficient to cover the full refund then company A may recover the excess from the Commissioner. The excess recovered by company A from the Commissioner must be claimed within 4 years of the date of payment of the dividend. In the case of a refund by a regulated intermediary, the process works in the same way as above, except that there is no recovery of an excess from the Commissioner: the regulated intermediary must refund the dividends tax out of any other dividends tax withheld by it (with no time limit). Page 15

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Example: refund mechanism X has until 19 May 2015 to submit the declaration to A. Say X submits the declaration on 10 Jan A must refund the R dividends tax to X and must take it out of any dividends tax withheld by it within 1 year from 10 Jan If dividends tax withheld by A during this period is insufficient to cover the R refund, then A must apply to the Commissioner by 19 May 2016 (4 years after the date of payment of the dividend) for the excess to be refunded. Facts: Company A pays a dividend of R5 million to Company X on 20 May A and X are not part of the same group of companies. No DTA applies. No declaration was held by A by 20 May Result: A has to withhold R in dividends tax and pay it to SARS on or before 29 June Page 16

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Dividends in specie (ss 64EA and 64FA) The company paying a dividend in specie is liable for the dividends tax in respect of that dividend (S64EA): ‘to the extent that’ wording. The dividends tax is based on the market value of the asset on the earlier of the date on which the dividend is paid or is payable. The dividend in specie is subject to the same exemptions (S64F) or DTA reduced rate treatment as if the dividend had been a cash dividend, provided that the declaration and undertaking are held or the group exemption applies. (S64FA) Transfer of an interest in a primary residence per para 51A is also exempt as a dividend in specie. As presently worded, no refund of dividends tax is available to the company where the declaration and undertaking is received late in the case of a dividend in specie. Page 17

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The meaning of ‘dividend’ The proposed Value Extraction Tax has been scrapped and S64C will not be applicable in respect of dividends tax. In order to determine whether an amount constitutes a dividend, the definition of ‘dividend’ in section 1 of the Act has been amended by the Taxation Laws Amendment Act of In its amended form an amount will be a dividend if it is ‘for the benefit or on behalf of any person in respect of any share in that company’. Excluded are: amounts transferred or applied out of contributed tax capital, scrip dividends and general share buybacks by JSE listed companies. The words ‘in respect of’ can be used to imply a wide or a close connection between the shareholding and the amount received. The question of whether or not such a link exists will depend on the facts and circumstances of each case. Page 18

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Examples: Amount received ‘in respect of’ a share (from 2011 Explanatory Memorandum) Facts: Company X is owned 60 per cent by Individual A and 40 per cent by Individual B. At the instance of Individual A, Company X makes a cash payment of R to Son (of Individual A) that is received by Son as a donation. Result: The R cash is being applied to Son in respect of Individual A’s shares in Company X and should accordingly be viewed as a dividend to Individual A. The R amount should then be viewed as a donation received by Son from Individual A. Page 19

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Low interest loans (S64E(4)) Where a loan or advance is provided by a company to a SA resident shareholder (other than a company) or to a connected person in relation to such a shareholder, the company is deemed to have paid a dividend if the loan is provided ‘by virtue of’ a share in the company. The amount of the dividend is based on the difference between the official rate of interest and the interest actually payable over the period during the year of assessment for which the loan or advance was outstanding. The dividend is deemed to have been paid on the last day of the year of assessment. Page 20

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Example: low interest loans Example 1: Adapted from 2011 Explanatory Memorandum Facts: Company A has a 30 June 2013 year end. A is owned 100 per cent by SA resident individual. At the instance of the individual, Company makes a zero-interest loan of R1 million to individual on 1 January The official rate throughout the period was 8 %. Result: The zero-rated loan is possible because individual owns all the shares of Company A, thereby being ‘by virtue of’ the shares held by individual. A deemed dividend arises in terms of S64E, calculated at the official rate as amended applied to the R1 million loan. Dividends Tax at 10 % is payable on last day of the month following the end of the year of assessment i.e. 31 July 2013, calculated for the time that the loan was outstanding i.e. 8 % x R1 million x 181 days / 365 days = R The dividends tax payable is 10 % of this = R The dividends tax would be payable annually (by the company – the dividend is in specie). The provision is unclearly worded from a transitional point of view: does one only calculate interest from 1 April 2012? If the shareholder is also a director, a fringe benefit arises in terms of para 11 of the 7 th Schedule. Page 21

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Beneficial ownership The ‘beneficial owner’ is defined in S64D as the person entitled to the benefit of the dividend. Example: Shares are held by a trust Result: If the beneficiaries of the trust have a vested right to the dividend, then they are considered to be the ‘beneficial owners’. If the rights are merely contingent, the trust will be the beneficial owner. This can lead to a double dividends tax problem (see below). DTA’s also rely on the concept of beneficial ownership to provide relief e.g. If the beneficial owner of the dividends is a company which is not a SA resident. There is lack of consensus internationally regarding the meaning of ‘beneficial ownership’. In the Canadian case of Prevost (The Queen v Prevost Car Inc 2009 FCA 57) it was held that the beneficial owner of a dividend is the person who receives the dividends for his or her own use and enjoyment and assumes the risk and control of the dividend he or she received. The person who is the beneficial owner of the dividend is the person who enjoys and assumes all the attributes of ownership. There is considerable lack of clarity as to whether the definition in S64D would hold sway over the meaning ascribed to the term in international law (see S233 of the Constitution of SA). ‘S233 of the Constitution of SA provides: ‘Application of international law.—When interpreting any legislation, every court must prefer any reasonable interpretation of the legislation that is consistent with international law over any alternative interpretation that is inconsistent with international law.’ Page 22

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DT Implications (1) 1.DT is paperwork intensive - obtain the declarations and undertakings so as not to be out of pocket in terms of cash flow (having to withhold dividends tax and only reclaim it later, and lowering risk of interest and penalties applying). In the case of dividends in specie, no refund mechanism is available where the declaration and undertaking are received late. Page 23

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DT Implications (2) Note the following: Even if a dividend is exempt e.g. if the beneficial owner is a SA resident company, the declaration and undertaking must be held by the date of payment of the dividend, unless the payment is made to a ‘regulated intermediary’ or the beneficial owner is part of the same group (per S41 definition). Even though DT is a tax on the shareholder, the company paying the dividend becomes personally liable for the payment of DT. Interest and penalties apply if DT is not paid on time (by the end of the month following the month of accrual to the shareholder). All directors and shareholders who are regularly involved in the management of the overall financial affairs of an unlisted company paying a dividend become personally liable for the DT, interest and penalties due by the company. (S64K(8)). Where DT is payable at a reduced rate as a result of a DTA, the declaration relied on by the company declaring the dividend must be forwarded to SARS. Page 24

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DT Implications (3) 2. Examine corporate structures. The risk is where a beneficial owner in the structure is a person who is not exempt (e.g. a trust or a non-resident). Example: Shares in SA Co 1 are held by a discretionary trust. The beneficiary of the trust is SA Co 2. The shareholders of SA Co 2 are natural persons. SA Co 1 declares a dividend. Result: SA Co 2 is not the beneficial owner of the dividend. Since the trust is discretionary, SA Co 2 merely has a spes and is not ‘entitled to’ the dividend. Dividends tax must therefore be withheld by SA Co 1 and, if the dividend flows up to SA Co 2 who on-pays it to its shareholders, dividends tax is deducted again. 3. STC credits at 31 March 2012 will need to be calculated. 31 March 2012 effectively brings to an end a deemed ‘dividend cycle’ for all companies. This dividend cycle will not require an STC return to be completed, as it will not result in dividends tax becoming payable (unless the company actually declares a dividend on 31 March 2012). Companies will also need to keep track of STC credits, and the allocation thereof, from this date forward. STC credits must be allocated pro-rata between the class of shareholders entitled to the dividend. Page 25

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